The decision by the UK Government to cut fuel duty in the budget this week comes from a noble aspiration to make life easier for those on lower and middle incomes. Doing this by cancelling the fuel escalator and cutting fuel duty, however, encourages people to consume more petrol and diesel and provides less incentive for individuals and for businesses to switch to alternatives where they are available. Supporting them by raising income tax threshold higher, faster, would have the same benefits but be better for the planet and better preparation for a world where fuel prices can only go up in the long-term.

In his budget speech, chancellor George Osborne argued: “The price of petrol has become a huge burden on families”. His solution was to cut fuel duty by one penny per litre and to cancel the ‘fuel escalator’ of the previous government which added a penny of tax every year to the cost of petrol above inflation. True, this must be put in the context of the combination of a high VAT rate as well as rising prices, but there are still better ways to offset that extra cost.

A central plank of the coalition agreement (page 30, if you’re looking) is the increase in the bottom rate of tax threshold, a key Lib Dem policy, which is to creep up to £10,000 over the course of the government. This is a much more sensible policy, helping people through tax relief so that they can make their own choices about how to spend that money. Giving that money back through a tax cut rather than a fuel duty increase  allows people to make environmentally sound choices because they become cheaper.

Taxes on petrol follow a fundamentally sound concept: the polluter-pays principle. If you’re going to pollute, you should pay society an amount of money equivalent to that pollution. The cheaper gas-guzzling cars are to run, the higher their cost to society through pollution.

It will never be possible for everyone to switch to bikes, walking and public transport, especially for those who live in rural areas or small villages poorly served by public transport. There are baby steps to take, however, choosing cars that get more miles to a gallon, or, even buying a hybrid, or learning to drive in a more fuel-efficient way. Finding solutions for people in these situations will be harder, and more expensive. This does not make those solutions less necessary.

Oil Prices: Only going one way in the long term (Image source: bybusiness.net)

Taking those steps has a second benefit: they prepare society now for the reality of rising oil prices and the likelihood of steadily rising carbon prices, both of which will make petrol more expensive. As the Arab awakening only grows in force and unpredictability and oil prices remain over $115 a barrel (not long ago it made headlines by crossing the $100 mark), the risk of short-to-medium-term price fluctuations is very high as old dictatorships fall and new regimes are, gradually, set up. The reality of long-term rising oil prices is even clearer. Also in the budget was a £16 price floor for the UK carbon market, which will increase the cost of most fossil-fuel based operations. This will only rise with tougher future legislation. To cut taxes on petrol is to deny the realities of rising oil prices and the growing need for tougher CO2 emissions regulations. The short-term pain relief will make the shocks of rising prices harder for people to manage or more and more expensive for the government to offset in the future.